Attorney explains: a LLC established without initial capital and withdrawals
Law firm Lepmets & Nõges has started a collaboration with the financial and legal magazine RUP! The magazine RUP (Accounting News) is the first economic publication in Estonia, targeting accountants and financial professionals, and has been published since 1995. The authors of practical materials, recommendations, and guidelines published in the magazine are top auditors, lawyers, tax consultants, and specialists from government institutions. Advokaadibüroo Lepmets & Nõges is now among them. Below, we present our response to the first reader question sent to us. What makes the story interesting is the fact that we were the third law firm to answer this question. The question was sent to us because the first and second responses were essentially contradictory. Our response is the correct one.
Reader's question
The limited liability company has been established without making any initial capital contributions. The shareholder has decided to distribute dividends from the profit of the year 2022 and wishes to offset the company's claim for receiving the capital contribution against the shareholder's claim against the company. The intention is to settle the income tax as well.
Question: What documents need to be prepared and how can this be effectively done in the business register? I received a response from the business register stating that a document regarding the capital contribution should be included with the application. Since no contribution has been made, unfortunately, there is nothing to add. And if a decision needs to be made (such as a decision on dividend payment), is it sufficient for the business register to accept it?
Responded by attorney-at-law Tauri Tigasson.
Previously, the Commercial Code § 140¹ subsection 4 stipulated a rule that until the full payment of the capital contribution by all shareholders, the limited liability company was not allowed to make any payments to the shareholders, except for salaries or other relevant remuneration. Therefore, previously it was not possible to pay out dividends, offset the company's claim against the shareholder's claim, or settle the capital contribution. However, this provision was declared invalid as of February 1, 2023, and the logic was changed by the Commercial Register Act.
The explanatory memorandum of the Commercial Register Act states: "With this draft, it is indeed provided that in limited liability companies established without making contributions before the entry into force of these amendments, there is an opportunity to offset the company's claim for receiving the capital contribution against the shareholder's claim against the company if the company has generated profit and the shareholders have decided to pay dividends. Although these dividends are not actually paid out, in the case of offsetting, the taxation of dividend payments is carried out as if the dividends had been paid out. Therefore, there is an obligation to pay income tax." Consequently, the business register should accept this possibility.
To the business register, a decision by the shareholders regarding the payment of undistributed profits should be submitted, specifying the amount that will be offset against the obligation to pay the capital contribution and, if necessary, explaining the aforementioned, including references to the relevant legislation and explanatory memorandum. As each case usually has its own specific characteristics, it is advisable to consult with a neutral individual knowledgeable in law.
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